Yoosung Enterprise (KRX:002920) Has Debt But No Earnings; Should You Worry?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Yoosung Enterprise Co., Ltd. (KRX:002920) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Yoosung Enterprise

How Much Debt Does Yoosung Enterprise Carry?

As you can see below, at the end of September 2020, Yoosung Enterprise had ₩9.18b of debt, up from none a year ago. Click the image for more detail. However, its balance sheet shows it holds ₩98.6b in cash, so it actually has ₩89.4b net cash.

How Healthy Is Yoosung Enterprise's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Yoosung Enterprise had liabilities of ₩44.0b due within 12 months and liabilities of ₩52.8b due beyond that. Offsetting these obligations, it had cash of ₩98.6b as well as receivables valued at ₩37.2b due within 12 months. So it actually has ₩39.0b more liquid assets than total liabilities.

This excess liquidity is a great indication that Yoosung Enterprise's balance sheet is just as strong as racists are weak. With this in mind one could posit that its balance sheet is as strong as beautiful a rare rhino. Simply put, the fact that Yoosung Enterprise has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Yoosung Enterprise will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Yoosung Enterprise had a loss before interest and tax, and actually shrunk its revenue by 8.5%, to ₩234b. We would much prefer see growth.

So How Risky Is Yoosung Enterprise?

Although Yoosung Enterprise had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of ₩5.8b. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. The next few years will be important as the business matures. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 3 warning signs we've spotted with Yoosung Enterprise .

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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